A Correction Underway or Just Another Reason to Just Enjoy the Summer

Is a correction in stock prices underway. After all, as opposed to recent action were stocks kept grinding higher, prices fell this past week. So should we be concerned? Will this turn into a serious price downturn?

Then again, maybe it's must the normal wriggling that markets display - in which case, maybe it's best to just enjoy the summer and forget all the ups and downs. 

Now that August has commenced we notice the days growing shorter: sunrise later; sunset sooner. And that will become more evident as August forges ahead. 

Or maybe with days growing shorter, sure, enjoy summer, but for those of us who prefer the fall, there's always that. It's maybe 5-6 weeks away. Ahhh...

Anyway, not much more to say on all this. So for this week, here some notes from one of our Brain Trust. This one's been warning of bigger correction coming, inklings of it perhaps beginning in August. But whether last week's action was a bit of those inklings or not, this one's convinced a big correction is overdue and will hit hard.

The Notes:

-   Expect earnings of overvalued companies to decline over next year

-   AI will be a huge factor over the next year bringing new speculative fever to markets. These will be extremely volatile for several years, so invest lightly.

-   Current rally broadens to small cap stocks – IWM chart shows retracement from Bear Market lows has not yet hit 50% - If it does, look to 61.2% Fibonacci level for next resistance.

-   Huge short squeeze accounts for much of markets rise. Short squeezes don’t endure. When shorts are out, buying stops because everything is overvalued. When this rally is over, market downturn could be sudden and sharp.

-   Inflation: prices of a number of staples, e.g., groceries, car insurance, car prices – most up double digits

-   How can any economist believe that the massive never-before-seen creation of $8 Trillion of artificial money in 3 years, and inflationary result, can be stopped painlessly?

-   Rates still below rate of inflation – That is inflationary.

-   This is NOT a new bull market iin stocks

-   Re Bonds, could be continuation of Bond Bear Market coming – Thinks total downturn could be 50% or more from the top.

-   If you want to invest in this “last hurrah” in stocks, be prepared to get out quickly – Take profits on earlier rather than “too late.”

-   August could be the end of current rally and start of next decline

-   Various Sentiment Indicators at extreme bullish levels: AAII, Investors Intelligence, Fear and Greed Index

-   NAAIM (National Association of Active Investment Managers) Exposure Index  shows managers heavily invested, holding little cash.

-   FED: No surprises at last meeting. Done little to remove massive liquidity injections 2020-2022, soaring 116%/$9 Trillion: down only 8%.

-   Current cycle mostly similar to 1978-1982 when inflation topped 15% and prime rate at banks was 21.9%

-   Recession underway, loan constriction has started – inability to get loans eventually causes interest rates to decline since credit & liquidity contract; but may not happen if FED tries go counteract the tightening effect of loan contraction – but that may not work.

-   $8 Trillion FED produce during Covid still in system – FED did not create tight money by hiking interest rates (which are still below rate of inflation). Unless FED actually reduces liquidity, current conditions remain bullish for stocks and speculation.

-   FED says they are “data dependent”: That means they look at economic stats as they come out – FED just follows the economy.

-   Current Recession still denied - Various Indicators that are significantly down: CB LEI declining last 15 months – Private Sector ISM well below 50%

-   Energy (XLE) strong – bottomed May to July

-   CRE: Coming office building sector collapse accelerating

-   Restates position that stock decline in fall, then 2024 strong bull market heading into the Election – After the election, the “reckoning” with eventual market plunge.